American University
Washington College of Law
Commencement Address
Senator Paul Sarbanes
May 22, 2005

Thank you very much. By the virtue of the honor you have conferred upon me, I am proud to consider myself as a member of the Washington College of Law community. I feel deeply privileged by the association.

I looked carefully at the program and noticed that I have received my degree, but you are yet to receive your degree. And I think that I may be the only thing standing between you and that objective; so I have drawn the lesson that I need to be brief, or at least as brief as a United States senator can be.

I have a long standing sense of connection to this community through a number of its members. I’m just going to mention a few. First Tony Morrella now a professor emeritus who’s a senior member of the faculty for many years and who I’m told has taught more students than any other professor. Of course Tony’s wife, Connie Morrella was a distinguished colleague of mine in the congress of the United States for many years and Maryland has been fortunate to be able to count the Morrella’s amongst its citizens. Jamin Raskin, a member of the faculty here and also the director of the Marshall-Brennan Program, whose wife worked on the staff of the Senate Banking Committee, an extremely able and effective member. Susan Zentay, a graduate here and now an adjunct professor who was also on my staff, and I can mention many others, the other one in conclusion is my colleague in the senate Robert C. Byrd.

Senator Byrd came to Washington as a member of the House of Representatives. He began law school here, the Washington College of Law, and for ten years attended the night school receiving his JD degree in 1983 cum laude. He’s the only member of congress ever to begin and complete his law degree studies while as a member of congress. Senator Byrd is now in his eighth term in the United States Senate, and before the end of this term he will become the longest serving senator in U.S. history. And he has brought tremendous leadership to the United States Senate and his belief in the Senate as an institution and in the workings of our constitutional system are unsurpassed and I want to recognize, obviously the tremendous contribution that this school of law made to Senator Byrd’s ability to carry the leadership on these very important issues in the United States Congress and in the country.

This law school brings a distinctive mention to the study of law with its explicit commitment to quote, “engage the community, the nation & the world through legal education.” This is a context for its remarkable range of programs outside of the classroom, some of which that have already been mentioned, but I wanted to make just brief reference to the Clinical Programs that takes students into the forgotten and under-served neighborhoods of our local communities and which is recognized nationally for its quality. The International Law programs that are incorporate new perspectives and practices, like the Inter-American Moot Court Competition, the International Human Rights programs, which are among the very best in the nation, and the Marshall-Brennan program which brings law students into area high schools, including into Maryland to introduce high school students to the principles and applications to the constitution and their own vital stake in them.

The Washington College of Law’s commitment comes in part by its history. Its founders more than a century ago were two determined and courageous women who had been refused admission into law school. It was the first law school founded by women and had the first law school dean. Every generation of faculty and students here have carried their commitment forward in fact only a few years ago the National Association of Public Interest Law named your dean, Claudio Grossman, as the dean of the year. There is a necessary interconnection between the personal and the society and this is something that the ancient Greeks understood very well. They knew that individual pursuits could not be carried out in a vacuum, but rather in a broader social context. They believed more over that the person who lived a completely private life wholly absorbed in private concerns, contributing nothing to the world beyond could not be truly happy. They looked with scorn upon such an individual for whom they had a specific and memorable word, an “idiotis,” and that is the root of our modern word idiot. And having read of the activities that go on here I am gratified to realize there are no idiots in the graduating class here today.

Too often in our society a sharp line laid down between the private and public sectors. The broader concerns of society are then assigned to the public sector, while the private sector is supposedly reserved for the pursuit of personal advancement even to the exclusion of all other goals. This single-minded pursuit of private gain and a total disregard for the public interest lay at the root of the recent scandals in our capital markets and the crisis in investor confidence. The public interest in the integrity and the efficiency of the capital market is obvious. More than one of every two American households is invested in the markets. The markets function as the savings of millions of Americans. Therefore, internal problems and public companies have consequence well beyond the concerns of their investors. They raise questions on a macroeconomic scale about the markets which after all are crucial to the functioning of our economy. The ramifications can be worldwide. Yet a number of highly public companies with their auditors were routinely relying upon convoluted and often fraudulent accounting devices to inflate earnings, hide losses, drive up stock prices.

In October of 2001, shortly after I’d become the Senate Chairman of the Banking Committee, Enron was the nation’s seventh largest corporation. It was reporting earnings each quarter 20 percent over the previous quarter. By the end of that year it was bankrupt. Enron was the canary in the mind shaft. In the stark judgment of the Wall Street Journal, Enron was seen to have engaged in activities that really one had to go back to the Great Depression to find comparable examples. In fact, we were then confronted with a range of improper conduct which really challenged us. And the question at the time became, are these just bad apples that we could solve the problem by deterrence, by punishment and, therefore, by deterrence. Or does this represent a breakdown in the system? The example of the bad apple was given by the then Secretary of the Treasury, Paul O’Neil, who when he was asked what should be done about it he said that these malefactors ought to be taken out and hung from the nearest tree. That was a solution which seemed to me to fall a little short of due process, I have to say to you. And in response to the situation, the Senate Banking Committee undertook a series of intensive hearings early in 2002 to determine whether the problems were really just the work of a few bad apples or whether they actually reflected systemicand structural flaws in the market.

We set out to do the job right. We scheduled an intensive set of hearings over a couple of months. Some of them we brought in the best people in the country. The lead off hearing had four, five former chairmen of the FCC at the witness table. As we moved along we had one hearing with three former chief accountants of the SEC of the witness table. As you can imagine this was rather heavy hearing and at one point a colleague of mine sitting over in this direction presumably not realizing his microphone was open said, “Phew this is really boring.” Well he was right, but shouldn’t have said it out loud for the whole room to hear. But at that point I had a colleague Senator Mike Enzy, of Wyoming, a Republican from Wyoming who, in the end, we worked very closely on this legislation. He is the only certified public accountant out in the United States Senate out of the 100 members. So when his colleague commenting on the testimony of these chief accountants said that this is really boring, Enzy this is so unlike him leaps into the discussion says it may be boring to you, but I haven’t had this much fun since I came to the United States Senate.

Well as we proceeded through, we reached the conclusion that there were systemic and structural changes. That simply relying on heavy penalties, although that’s part of the legislation and enforcement was not enough we had to change the system. The fact that the heavy penalties were not enough in terms of deterrence as illustrated by the story told by Professor John Coffee, a security’s lawyer of Columbia who testified before our committee, and he told the story that in 18 th century London, this goes to deterrence. Of course by the time you have a bad apple a lot of damage has been done. But in 18 th century London, the punishment for pick-pocketing was hanging. And the hangings were public and huge crowds would assemble to see the hanging. So a pickpocket was apprehended, tried, convicted and sentenced to hanging. The morning of the hanging, thousands gathered on Tyburn Hill to see the hanging of the pick-pocket as a deterrent to other pick-pockets; and working the crowd of thousands were other pick-pockets.

We reached a remarkable consensus from our witnesses about what the problems were, inadequate oversight of accountants, lack of auditor independence, weak corporate governance procedures, stock analyst conflict of interest—they were urging their clients to buy a stock and meanwhile they were sending emails to one another about what a dog that particular stock was—inadequate disclosure provisions—Ken Lay, the head of Enron in a meeting with this employees was urging them to buy the company stock and was telling them what a good buy it was, this is in the fall of 2001 at the very same time he was selling his stock in the company, and because the law was inadequate that did not have to be instantaneously disclosed, and then grossly inadequate funding of the Securities and Exchange Commission. The response to these problems took the form of the legislation to which reference was made. It built on the legalization of the 1930s. I’m sure many of its provisions are familiar to you. We ended self regulation for the accounting profession and established public company accounting. [END OF SIDE A]

The Superior Bank in the Chicago area failed. The auditor—and it failed because the valuation that was placed on the residuals was erroneous. The company that was the auditors for the bank were also hired by the bank as consultants, they put the financial system into place by which the residuals were valued. And then they came along as auditors to check-out the valuation of the residuals. I mean, it’s a classic conflict of interest situation. We set standards for corporate governance, among them and perhaps one of the most important requiring public companies to have audit committees independent of management. The auditors are now hired fired and paid by the audit committees, not by the management of the company, which was previously the case. We require numerous disclosures, including prompt disclosure of trade in company stock, disclosure of material off balance sheet transactions. Enron had all these off balance sheet transactions. No-one knew what was happening. We gave strong authority to the SEC and stock exchanges to adopt rules prohibiting stock analysts conflict of interest and to establish safe guards against retaliation with respect to lawyers who of course have an important role to play. The legislation requires now that any lawyer hired as counsel to a corporation if he sees what he regards as improper conduct is required to report it up the corporate ladder, all the way to the board of directors if necessary. In other words you can’t just simply take it from the CEO that this is all ok and let it stop at that point. We had a further argument whether lawyers would be required to go outside of the corporate structure and we did not resolve that issue. The SEC has looked at it, and whether they take any steps with respect to it remains of be seen. And we had a major increase in the budget of the SEC so it could do the task ahead of it. The SEC traditionally has been the crown the jewel of our regular agencies and had fallen on hard times and it can’t do the job if it doesn’t have the resources. Now nearly three years after its enactment with the legislation fully implemented, we can see its effects taking hold. The SEC has been re-invigorated, the Public Company Accounting Oversight Board is fully optional over seeing auditors. Both are vigorously carrying out their respective responsibilities as gatekeepers. A ripple effect is now taking place beyond the statutory requirements. Corporate governance practices are changing for the better. Internal controls are being implemented. And while some object that the cost is to high, others remind us that the cost of loss of public confidence is even higher. The issues are complex but the underlying principles are straight forward. The capital markets will not function effectively unless investors have full confidence in the markets’ integrity and transparency. Cleaning up the recent scandals is not enough. The challenge is to assure a solid foundation for the future. This means that, amongst other things, the gatekeepers must do their job. Auditors, the lawyers, the company directors carry a responsibility to keep in mind the public interest and their responsibility is not simply to carry through not what that management may seek, but to apply it; to hold that to the standards that has been established in terms of what is proper and appropriate. Beyond that Chairman Donaldson of the Securities and Exchange Committee has spoken eloquently and often on this point and I quote him. He speaks of corporate leaders but it applies to auditors, it applies to lawyers, all involved and trying to make this economic system work, “Successful corporate leaders must strive to do the right thing in disclosure, in governance and otherwise in their business, and they must instill in their cooperation this attitude of doing the right thing. Simply complying with the rules is not enough; they should make this approach part of their company’s DNA.”

You are now about to embark on a career in the law. Each of you will take a different path. I urge you, whatever your path, always strive to uphold the public interest. As Donaldson said, “Do the right thing.” Mark Twain has counseled us, “it will gratify some people and astonish the rest.” But I wish you the very best as you move out into our society. We need your commitment, your compassion, your strength, and your principled behavior to build a more decent and just society. Thank you.